Shoal May 2017 PDF

Siddharth Rajeev, B.
Tech, MBA, CFA
Tharushi Perera, B.Sc, ACMA,CGMA
May 8, 2017
Shoal Games Ltd. (TSXV: SGW / OTCQB: SGLDF) Launches new app with an aggressive
distribution strategy
Sector/Industry: Mobile Games www.shoalgames.com

Market Data (as of May 8, 2017) Highlights
Current Price C$0.57
Fair Value C$1.85 Shoal Games Ltd. (Shoal, company) launched its latest app,
Rating* BUY Rooplay, worldwide on Android in April 2017. The platform
Risk* 5 (Highly Spec) currently offers over 500 games / educational titles for children.
52 Week Range C$0.39 C$0.75 The vision for Rooplay is to be the Netflix of Games for kids.
Shares O/S 59,708,318 Game based learning has been gaining traction across the globe at
Market Cap C$34.03 mm
a rapid rate. For example, sources suggest that 48% of teachers
Current Yield N/A
currently use games in their classrooms in 2015, up from 30% in
P/E (forward) N/A
P/B N/A
2012. Ambient Research estimates that the game based learning
YoY Return -24.0% market will grow from $2.7 billion in 2016, to $7.3 billion by
YoY TSXV 18.7% 2021, reflecting a 22% p.a. growth rate.
Shoal intends to attract users for Rooplay through direct
*see back of report for rating and risk definitions marketing to consumers and through B2B (business to business)
*All the figures are in US$ unless otherwise specified. partnerships with mobile handset manufacturers, cable
companies, and mobile telecommunications operators.
Rooplay was first launched in English. The first non-English
version was launched in Iran through a partnership with the
largest android marketplace in Iran, with over 28 million active
users.
Rooplay is now live in 27 languages. Management has planned an
aggressive marketing strategy for the next 12 months.
We are raising our fair value estimate from C$1.50 to C$1.85 per
share.
2017 Fundamental Research Corp. 10+ Years of Bringing Undiscovered Investment Opportunities to the Forefront www.researchfrc.com
PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
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Launches Rooplay was officially launched by Shoal at the GSMAs Mobile World Congress (the
Rooplay world's largest conference for the mobile industry) in Barcelona in March 2017. Shoal had
announced its intent to develop Rooplay in September 2016. In our previous update report
in December 2016, we had presented a brief overview of Rooplay based on the information
disclosed by the company at that time. The company has made significant progress since
then. The following section presents a detailed overview of Rooplay, its features, target
market, revenue model, and managements marketing strategy.
Overview
Rooplay is a games / educational platform primarily targeting kids aged 2 to 10 years. The
vision for Rooplay is to be for games how Netflix is for videos and Spotify is for music.
The platform is specifically designed to be totally safe for kids as it has no advertisements,
no in-app purchases, no outbound links, no instant messaging, and no social networks.
The primary objective of the app is to keep kids engaged by providing a wide range of games
and educational content, and encourage learning through gaming. Family games will also be
a major segment of the platform. Examples of common titles include puzzles, paint
pictures, practice language, learn math, etc. Managements goal for Rooplay is to eventually
offer thousands of curated games developed in house and licensed from third-parties. The
app currently has over 500 games, mostly licensed from independent developers around the
world, with branded educational games primarily developed in-house.
Although there are several apps targeting kids in the market today, most of them are
either purely game apps or educational apps. Rooplay is unique as it is a platform of in-
house and licensed content that not only includes games and learning apps for kids, but also
family games which allows parents / adults to participate in playing games with their kids.
Management realizes that the development of exclusive content is critical to the competitive
position of Rooplay. One of Shoals key strategies is to license popular intellectual
property rights for use in games and learning apps. For example, several games on
Rooplay feature Garfield; the following four titles are currently live - Garfield Math Bingo,
Garfield ABCs, Garfield Coloring Book, and Garfield Memory Match. Shoal has another 10
games in development featuring Garfield. These games are likely to instantly appeal and
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capture the attention of the approximately 19 million Facebook (Nasdaq: FB) fans of
Garfield, allowing Shoal to attract a much larger user-base at much lower player acquisition
costs.
The companys goal is to produce five new games per month initially, and increase to 10 per
month over the longer-term.
Marketing Strategy
Rooplay is exclusive to the Android operating system. As show in the chart below, Android
currently holds approximately 88% of the global smartphone market. Apple iOS is
approximately at 12%.
Global Smart Phone by Operating System
Source: Strategy Analytics
Rooplay was initially launched in English. In order to rapidly expand globally, the platform
is now available in 27 different languages. A Persian version of Rooplay (see image below)
was launched in Iran though a partnership with Caf Bazaar, which is the largest
android marketplace in Iran with over 28 million active users. The market share of
Android in Iran was 87% as of March 2017 (Source: StatCounter). Caf Bazaar caters to
Persian speaking users, and offers over 25,000 downloadable Iranian and international apps
for gaming, social media, messaging and other uses. On average, the platform gets
approximately 20 million visits per week.
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Shoal intends to gain traction through direct marketing to consumers and through
partnerships with mobile handset manufacturers, cable companies, and mobile
telecommunications operators through a revenue share model. The company has disclosed
that they are already in contact with leading telecom players in Canada, the US, the UK,
Spain, Brazil, Sweden, Morocco, Saudi Arabia, Kenya, South Africa, and many more. China
is also going to be a major target market for Rooplay.
Revenues from direct marketing to consumers will be based on a monthly subscription

recurring revenue business model. Management has set a subscription price of $//4.99
per month, after a 30-day trial period.
Management estimates a direct user acquition cost of $2 per install, and a 3.5% coversion
rate from installs to paid subscibers. The user acquisition cost is zero when partnered through
mobile operators. The average expected cost is $0.20 per install assuming 10% direct user
acquisiton and 90% through partnerships. This translates into a cost of $5.7 per paid
subscriber. The estimated life of a paid subscription is approximately 25 months, which is in
line with Netflix. At $4.99 per month, the estimated lifetime revenue of a Rooplay
subscriber is approximately $125.
In comparison, Netflixs user acquisition cost is approximately $18 and the lifetime revenues
are approximatley $290. Their gross margin is 35% ($102 per user), and the operating
margin (excluding general and administrative expenses) is approximately 17% ($49 per
user). This reflects a gross profit to user acqusition cost of 5.6x and operating profit to user
acquisiton cost of 2.7x.
Shoals management estimates a gross margin of 65% for direct acquisitions. After deducting
the component of revenues that will be shared by partners (which we estimate at 50%), we
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estimate a gross margin of 35%. This implies a gross profit of $43.7 per subscriber (35% of
$125 life time revenues) from a user acquisition cost of $5.7, or multiple of 7.7x.
We believe managements estimates regarding conversion rates and user acquistion

costs are reasonable based on our review of industry standard metrics, presented
below.
According to Monetate, the typical conversion rate of apps (all types) is approximately
2.95%. Gaming apps tend to have higher conversion rates due to their addictive feature.
Source: Monetate
The following chart shows the typical costs per install by country. It is approximatley $2.96
in the U.S.
Source: XXX
In the gaming sector, the average cost per install for Android is $3.48, and the average
conversion rate is 7.9%. The total cost to acquire a paid subscriber is $43.92.
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Source: Mobile Gaming Apps Report
The cost per install and conversion rates vary widely across regions.
Source: Mobile Gaming Apps Report

Unicorn The best example of a successful system in the e-learning space is ABCmouse, which is an
company as a educational app and online system in English focused on kindergarten and early elementary
benchmark school programs. Launched in 2010, the platform currently has approximately 8,500
individual learning activities. It is estimated to have over 1 million paid subscribers at a
monthly rate of $7.95. With revenues of over US$100 million, the platform is currently
valued at approximately $1 billion (valued based on a $150 million private equity
investment in 2016). ABCmouse is owned by Age of Learning, Inc., a privately owned
education technology company based out of Glendale, California.
Gaming app According to Statista, global gaming app revenues are expected to grow from US$50.4
industry billion in 2016, to $105.2 billion by 2021, reflecting a CAGR 16%.
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Source: Statista
According to Ambient Insight, game based learning is expected to grow by 23% p.a. over the
next five years the fastest compared to six other learning technology types.
Global 5-year growth rates (2016 2021) of seven learning technology product types
According to the Speak Up organization in the U.S., 48% of teachers used games in their
class rooms in 2015, up from 30% in 2012.
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Source: Speak Up
The global gamification market is expected to grow from US$1.7 billion in 2015 to US$11.1
billion by 2020, reflecting a compounded annual growth rate of 46% (according to Docebo).
Ambient Research estimates the game based learning market will grow from US$2.7 billion
in 2016, to US$7.3 billion by 2021, reflecting a 22% p.a. growth rate.
The following chart shows the expected growth of game based learning from 2016 to 2021
by region.
Page 9
Source: Ambient Insight
The sector has been getting a lot of attention from private equity over the past two years. As
shown below, in the first half of 2016, approximately US$325 million was invested into 37
game based learning companies.
Global private investment in game-based learning companies
In summary, we believe the market conditions are very conducive for an up and
coming new app, such as Rooplay, in the rapidly growing game based learning market.
We believe the positive industry outlook, combined with managements aggressive
marketing strategy, offer Shoal exciting upside potential.
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Bingo Gaming Shoals current revenue generation is from its first two gaming apps, focused on bingo,
Apps namely Trophy Bingo and Garfields Bingo (launched in late 2016). The two apps have had
over 500,000 installs. The apps are live in the Apple, Google and Amazon App Stores.
Unlike Rooplay, revenues from these apps come from in-app purchases. The target market of
these apps is much smaller than Rooplay. The bingo market is estimated to be approximately
$150 million in annual revenues, and is dominated by two leaders Bingo Blitz and Bingo
Bash.
The company has plans to launch Garfield Bingo China by partnering with a local
distribution company. China is a major market for mobile gaming. As an example of the
potential for a Garfield game in China - in December 2015, Animoca Brands (ASX:
AB1) launched a localized version of their popular mobile game, Garfield Chef, in China
through Xiaomi the number one smart phone manufacturer in China. The app had 7
million downloads within the first 12 months.
Delay in financings to fund player acquisition strategies prompted Shoal to scale back its
marketing expenses associated with the bingo apps. Also, in August 2016, the companys
development partner, Roadhouse Interactive Limited, was placed in receivership. The
company had prepaid approximately $0.50 million to Roadhouse, which had to be written
off in Q3-2016. Although Roadhouses demise was concerning, management of Shoal was
able to quickly deal with the setback by providing direct employment to the key members of
the development team at Roadhouse. Shoal brought in a new VP of Development, Kirsten
Forbes, who was previously the VP Product Development at Roadhouse Interactive.
The company has leased an office in Vancouver, and currently has an 11 member
development team there, in addition to a few programmers from the Rooplay team in
London.
Financials As a result of the above, Shoal reduced their marketing expenses significantly to just $9k in
Q4-2016, down from $26k in Q3, $167k in Q2, and $201k in Q1. The decline in marketing
spending impacted the companys overall performance in Q4, as revenues dropped to $38k
versus $53k in Q3, $78k in Q2 and $110k in Q1 (see chart below).
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The strong first half allowed the company to report strong YoY revenue growth of 150% to
$0.28 million. 2016 EBITDA was -$2.62 million versus - $2.95 million in 2015.
In 2016, the company reported a net loss of $3.16 million (EPS: -$0.05) versus $2.97 million
(EPS: -$0.05) in 2015. Excluding the write-off, the company reported a net loss of $2.66
million (EPS: -$0.04) in 2016.
Management estimates 2017 operating expenses (including G&A, compensation, consulting

expenses) will be approximately $1.4 million, and third party games and development
expenses will be approximately $150,000.
Balance sheet Free cash flows were -$2.48 million in 2016 versus -$2.38 million in 2015.
and cash flows
Page 12
At the end of 2016, the company had $60k in cash. Working capital and the current ratio
were $13k, and 1.1x, respectively.
The company has a line of credit and loan arrangement with the Chairman, Tarrnie Williams,
and another major shareholder, for up to $5 million; $348k was drawn at the end of 2016.
The two individuals own 77% of the outstanding shares. We consider the continued support
from the major shareholders as positive and indicate their continued conviction in the
business outlook.
Stock options and warrants: In December 2016, the company granted 1.01 million
employee / director / consultant stock options with an exercise price of C$0.54 per share. The
company has no warrants outstanding.
Valuation The following table shows our revenue forecasts:
Our revised Discounted Cash Flow Valuation is C$1.85 per share, up from our previous
estimate of C$1.50 per share. Our valuation increased as we included potential cash flows
from Rooplay, offset by a reduction in our forecasts for the bingo apps. We also raised our
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discount rate assumption from 11.3% to 15.0%, for conservatism, as Rooplay is in early
stages.
The following table shows a summary of our valuation models:
We are maintaining our BUY rating and raising our fair value estimate to C$1.85 per share.
Shoals key strength is its strong management team and the unique value proposition of
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Rooplay.
Our fair value estimate is heavily dependent on Rooplays ability to gain traction. We believe
the high discount rate of 15% used in our models appropriately captures the risk associated
with the business.
If Rooplay is able to gain traction quickly, we expect Shoals valuation to be significantly

higher than our current estimate.
Risks The following risks, though not exhaustive, may cause our estimates to differ from actual
results:
The companys primary apps are in early stages.

Attracting players and keeping them engaged is critical and requires continuous
development and innovation.
The social games sector is highly competitive.
The social bingo gaming market is currently dominated by two established players.
The company may have to pursue equity financings, which may dilute existing
shareholders.
The social games sector is currently not subject to any material regulations. Any
unfavorable changes in regulations in the future may impact the companys business.
Management and insiders own over 75% - 80% of the outstanding shares. Therefore,
the liquidity and the average daily trading volume of SGWs shares are low at this
time.
We maintain our risk rating of 5 (Highly Speculative).
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APPENDIX
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Fundamental Research Corp. Equity Rating Scale:

Buy Annual expected rate of return exceeds 12% or the expected return is commensurate with risk
Hold Annual expected rate of return is between 5% and 12%
Sell Annual expected rate of return is below 5% or the expected return is not commensurate with risk
Suspended or Rating N/A Coverage and ratings suspended until more information can be obtained from the company regarding recent events.
Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry.
The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is
conservative with little or no debt.
2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive
to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash
flows (though current free cash flow may be negative due to capital investment). The companys capital structure is conservative with little to modest use of debt.
3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive
to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and
coverage ratios are sufficient.
4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a
turnaround situation. These companies should be considered speculative.
5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products.
Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding.
These stocks are considered highly speculative.
Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any forward looking statements are our best estimates and
opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness.
There is no guarantee that our forecasts will materialize. Actual results will likely vary. The analyst and Fundamental Research Corp. FRC does not own any shares
of the subject company, does not make a market or offer shares for sale of the subject company, and does not have any investment banking business with the subject
company. Fees were paid by SGW to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence
including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts
may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are
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users through various other channels for a limited time.
The distribution of FRCs ratings are as follows: BUY (71%), HOLD (8%), SELL (5%), SUSPEND (16%).
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This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stocks performance inherently involve risks and
uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are
not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services;
competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in
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Siddharth Rajeev, B.

Tech, MBA, CFA

Tharushi Perera, B.Sc, ACMA,CGMA

Sector/Industry: Mobile Games www.shoalgames.com

Global Smart Phone by Operating System

Source: Strategy Analytics

Revenues from direct marketing to consumers will be based on a monthly subscription

We believe managements estimates regarding conversion rates and user acquistion

Source: Mobile Gaming Apps Report

Source: Mobile Gaming Apps Report

Source: Ambient Insight

Global private investment in game-based learning companies

Management estimates 2017 operating expenses (including G&A, compensation, consulting

Valuation The following table shows our revenue forecasts:

The following table shows a summary of our valuation models:

If Rooplay is able to gain traction quickly, we expect Shoals valuation to be significantly

The companys primary apps are in early stages.

We maintain our risk rating of 5 (Highly Speculative).

Fundamental Research Corp. Equity Rating Scale:

Fundamental Research Corp. Risk Rating Scale:

Disclaimers and Disclosure

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